OK for Now
The markets rebounded well in February overcoming a near nine percent correction to end the month with a positive reading of 3.10% and putting the yearly number at a modest loss of 0.61%. You can see our results on the Performance page. Despite the lack of volume, the technical picture of the market remains encouraging with new highs in buying power and new lows in selling pressure having been put in place last week. As for the volume, it could well be just a symptom (source Lowry) of hedge funds leveraging up in the bull market of 2005-2007 (sometimes as much as 30-40x) and then have their leverage crater in the bear market of 2007-2009. As stated in the past, the fundamentals also look reasonable if for no other reason than a lack of competition. Here are some positive thoughts going forward as well as a warning about the financial mess that must eventually be addressed that come primarily from the research at The Bank Credit analyst (BCA).
High unemployment, low inflation, weak consumer and business confidence argue against a near term hike in interest rates and this should allow the economy to chug along at a modest pace.
The dollar has been strong as a result of the Greece induced flight from the Euro, but continues to weaken against most emerging market currencies: a plus for EM sovereign debt.
Fears of sovereign debt risk (Greece, Spain, Portugal, Ireland, Italy), low interest rates, and fears of monetizing deficits provide a bullish environment for Gold.
Despite the recent correction in commodity prices (largely the result of a strong dollar) they remain in an overall uptrend. Energy is at a multi-year low relative to industrial commodities (mainly because of high inventories and China's demand for copper) and may well reverse this trend shortly as inventories work themselves off and the driving season begins.
and now for the warning...
Because of the aging population and increasing entitlement programs, the Congressional Budget Office (CBO) predicts that public debt could approach 300% of the GDP by 2050. Of course this cannot possibly happen, but what will reverse the trend. BCA offers three potential solutions:
Economic growth. If the consumer picks up his spending or if some technological breakthrough were to add to the current productivity, this could potentially solve the problem.
A bipartisan effort to slice the deficit. This would seem to be a no brainier, but with Congress for the most part only looking out as far as the next election, I wouldn't hold my breath.
Markets force change. This of course would be the worst scenario, as it would result in a market crisis and meltdown of most assets.
Given the fact that the market appears to be in a sustained economic recovery, any financial troubles would appear to be several years down the road and the market looks ok for now; however, when and if we do get to that point, let's hope bullet points one and two solve the problem.
-Joe